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CALIFORNIA CORPORATE & SECURITIES LAW

How To Win Custody Of A Corporation

In family law, the fights are often over who gets custody of the kids, the pets and the house.  Shareholders battle over many things, but you don’t often hear of custody fights in the corporate context.  Is it even possible to win custody of a corporation?  In Nevada, the answer is yes.

NRS 78.347 allows any stockholder to apply to the district court to appoint one or more persons to be custodians of the corporation.  There are two grounds for such the appointment of a custodian:

  • The business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that a required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or
  • The corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets in accordance with Chapter 78 of Nevada Revised Statutes.

An applicant for custodianship (who may or may not be the stockholder) must supply detailed information to the court, including disclosures regarding regulatory misdeeds.  NRS 78.347(2).  The district court must order any applicant awarded custodianship to take a number of actions, including the giving of notice of a shareholders within a “reasonable time” after an application for custodianship has been granted.  NRS 78.347(3).  A custodian has all the powers and title of a trustee appointed under NRS 78.590, 78.635 and 78.650, but the authority of the custodian is to continue the business of the corporation and not to liquidate its affairs or distribute its assets, except when the district court so orders and except when corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.  NRS 78.347(6).

Do courts ever appoint custodians?  U.S. District Court Judge Jennifer A. Dorsey recently did so in Souza v. Elevate, Inc., U.S. Dist. Ct. D-Nev. Case No. 2:17-cv-001924 (Sept. 19, 2017).

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